Silver pullback provides better reward/risk ratio


Yesterday’s session was a tale of two markets, as stocks trended steadily lower in the morning, reversed at mid-day, then rallied back in a symmetrical pattern. In the end, the major indices averted sharp losses and finished near the flat line. The Nasdaq Composite, down 1.8% at its intraday low, finished with a closing gain of 0.3%. Both the S&P 500 and Dow Jones Industrial Average edged 0.1% higher. The small-cap Russell 2000 and S&P Midcap 400 indices rose 0.3% and 0.2% respectively. The main stock market indexes closed near the upper quarter of their intraday ranges.

Total volume in the NYSE eased 5%, while volume in the Nasdaq was 8% lighter than the previous day’s level. The relationship of lighter volume with slightly higher prices was not very significant. However, upon closer inspection, we noted turnover was lighter during the morning decline, then picked up during the afternoon reversal. This pattern was positive, as it hinted at diminishing selling pressure and stealth accumulation near the lows. Nevertheless, the market still needs to register a convincing day of higher volume gains in order to confirm the return of, or at least the start of, institutional buying interest.

In yesterday’s commentary, we annotated two charts to illustrate the potential buy setup in iShares Silver Trust (SLV), which has started showing relative strength to SPDR Gold Trust (GLD). Since SLV had just broken out above major resistance of its weekly downtrend line, our initial plan was to buy SLV on a very slight rally back above its December 2009 high ($19.11), but that didn’t happen in yesterday’s session. Instead, SLV declined 2%, closing right at support of last week’s breakout level. This now presents us with a more ideal entry price on a pullback, rather than as a continuation of the breakout. Yesterday’s pullback to support of the breakout level is shown on the daily chart of SLV below:


With new support of both the recent breakout level and the 20-day exponential moving average just below the current price of SLV, we are now presented with a more positive reward-risk ratio for buy entry. In fact, we generally prefer buying most commodity ETFs on pullbacks, rather than breakouts, because these types of ETFs commonly undergo price “shakeouts” that are easier to withstand if a lower entry price is obtained. Therefore, going into today’s session, we plan to buy SLV near its current price. Regular subscribers to The Wagner Daily should note our detailed trigger, stop, and target prices under “Today’s Watchlist” below.

U.S. Natural Gas Fund (UNG) was another buy setup we’ve been discussing over the past few days. Yesterday, UNG demonstrated constructive price consolidation above its 50-day MA, and came within a few cents of our buy entry point. In today’s pre-market session, natural gas futures are trading more than 1% higher. If that strength continues into today’s open, UNG will gap above horizontal price resistance of its lengthy base of consolidation, thereby triggering our buy entry point. Our buy point is shown on the daily chart of UNG below:


After the higher volume losses in the broad market on May 14, we said in yesterday’s commentary, “When higher volume losses occur near the top of a range, it is a bearish “distribution day” that warns of institutional selling, which often precedes substantial corrections in the broad market. However, when higher volume losses occur after the broad market has already been in correction mode for a significant period of time, it is sometimes positive because it could be indicative of climactic selling. Obviously, this doesn’t mean stocks will not ultimately go lower, perhaps even retesting the May 6 lows, but it does tell us that near-term selling pressure may soon dwindle.” The v-shaped price action that followed in yesterday’s session was in line with this analysis, as we saw both a significant retracement of the May 6 range, as well as buying interest that followed.

The broad market’s next move may be an attempt to follow through on yesterday’s bullish intraday reversal. If it does so on higher volume, it will surely catch our attention. Nevertheless, major overhead supply still remains, as well as resistance of the 20 and 50-day moving averages. With volatility still running high and stocks undergoing erratic, indecisive price action, traders might still consider a heavy cash position to be wise. In line with recent market sentiment, we are holding two short positions, but now we’re also planning to enter one to two new long positions (UNG and/or SLV) today.

Today’s Watchlist:

U.S. Natural Gas Fund (UNG)

Shares = 800
Trigger = $7.75 (above the highs of the recent range)
Stop = $6.94 (below the gap of last week’s lows)
Target = $9.50 (just shy of the 200-day MA resistance)
Dividend Date = n/a

Notes = See commentary above, as well as in our May 13 and 14 commentary, for explanations of the setup.

iShares Silver Trust (SLV)

Shares = 600
Trigger = buying at market, five minutes after today’s open (approx. $18.40)
Stop = $17.39 (just below the 50-day MA support)
Target = new highs (will trail stop)
Dividend Date = n/a

Notes = See commentary above for explanation of the setup.

Daily Performance Report:

Below is an overview of all open positions, as well as a performance report on all positions that were closed only since the previous day’s newsletter. Net P/L figures are based on the $50,000 Wagner Daily model account size. Changes to open positions since the previous report are listed in red text below. Please review the Wagner Daily Subscriber Guide for important, automatic rules on trigger and stop prices.

    position summary

    Having trouble seeing the position summary graphic above? Click here to view it directly on your Internet browser instead.


  • We lowered the stop in IYM, and will continue to trail it tighter as price action allows. The IWM stop remains the same for now, but we will look to tighten it if the market follows through with gains today.
  • Reminder to subscribers – Intraday Trade Alerts to your e-mail and/or mobile phone are normally only sent to indicate a CHANGE to the pre-market plan that is detailed in each morning’s Wagner Daily. We sometimes send a courtesy alert just to confirm action that was already detailed in the pre-market newsletter, but this is not always the case. If no alert is received to the contrary, one should always assume we’re honoring all stops and trigger prices listed in each morning’s Wagner Daily. But whenever CHANGES to the pre-market stops or trigger prices are necessary, alerts are sent on an AS-NEEDED basis. Just a reminder of the purpose of Intraday Trade Alerts.
  • For those of you whose ISPs occasionally deliver your e-mail with a delay, make sure you’re signed up to receive our free text message alerts sent to your mobile phone. This provides a great way to have redundancy on all Intraday Trade Alerts. Send your request to [email protected] if not already set up for this value-added feature we provide to subscribers.
    Have you had your free 1-month trial to Morpheus Trading Group’s additional ETF and stock trading newsletters?

      Edited by Deron Wagner,
      MTG Founder and Head Trader